Treasurys head towards weekly gain after economy loses more jobs than forecast

Government to sell $73 billion in bonds next week

By

DeborahLevine

NEW YORK (MarketWatch) -- Treasury prices rose Thursday, pushing 2-year note yields to the lowest in about a month, after the Labor Department said the U.S. economy shed many more jobs than expected, raising concerns that continued weakness in consumer spending will slow the economy's recovery.

"This tells us that employment is still under huge stresses," said William Bellamy, who manages about $1 billion as director of fixed income at Thompson Siegel & Walmsley. "Given the lack of improvement in the employment picture, yields should move lower."

Yields on 2-year notes
TMUBMUSD02Y, -0.17%
fell 7 basis points to 0.98%, falling below 1% for the first time since June 4. A basis point is 0.01%.

Ten-year note yields
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also declined, down 4 basis points to 3.50%, the lowest since May 29.

Bond prices move inversely to their yields.

Two-year yields have fallen from 1.11% a week ago, heading to a fourth week of declines as investors readjust hopes for a robust recovery from the recession.

Ten-year yields are down slightly from 3.50% from last Friday, helding onto gains from last week's big drop in yields.

Traders expect volume to thin ahead of the Independence Day holiday, with markets closed on Friday.

The economy lost 467,000 jobs in June, and the nation's unemployment rate rose to 9.5%, with both figures looking worse than in May. Analysts surveyed by MarketWatch had forecast a loss of 325,000 for nonfarm payrolls and a jobless rate of 9.6%. See more on June jobs data.

The payrolls decline is "shockingly big relative to consensus expectations," said James Caron, head of U.S. interest-rate strategy at Morgan Stanley. "May numbers were a ray of hope that has been dimmed and markets are reacting in kind."

Fed futures

The payrolls report may overshadow lingering concerns about inflation, which erodes the value of fixed-income holdings, as continued slack in the labor market doesn't coincide with rising prices, said William O'Donnell, head of Treasury strategy at RBS Securities.

"The two don't happen together which is a core theme here that underscores our view that real rates are very attractive at current levels," he said.

Interest-rate futures traders pared expectations that the Federal Reserve will raise benchmark rates from the current range of zero to a quarter of a percent. Fed funds futures for December indicate a 25% chance of interest rates rising a half of a percentage point by then, down from a 33% chance before the jobs data.

Auction amounts

U.S. debt remained strong after the Treasury Department said it will sell $73 billion in debt next week, less than some analysts anticipated.

The government said it will sell $8 billion in 10-year inflation-indexed debt on Monday, followed a day later by $35 billion in 3-year notes
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Both amounts are unchanged from the previous sale of new securities, in January and June, respectively. Wrightson ICAP, a research firm specializing in government finance expected each to be increased by $2 billion.

Wednesday will bring $19 billion in 10-year notes, with another $11 billion in 30-year notes
TMUBMUSD30Y, +0.12%
on Thursday. Those amounts match last month's sales and Wrightson's forecasts.

The latter two auctions will be re-openings of securities sold during the government's quarterly refunding in May, meaning they carry the same coupon and maturity date as the original debt.

The Treasury is using re-openings as a way to spread out the sales of increasing amounts of debt needed to finance the government's and the Fed's programs to revive the economy and ease credit-market strains. This will be the first time the government reopens the so-called long bond for both months between refundings.

Expectations of more debt supply tend to weigh on bond prices because greater issuance reduces the value of current holdings. However, that may not happen this time, Morgan Stanley's Caron said.

"If anything, people will look at this in a welcoming sense," he said. "We're in an environment where rates will stay low based on the Fed and the economy is not going anywhere at an accelerated pace, so fixed income is a safe place to hang out."

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